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The introduction of GST in Malaysia

After several years of indecision and months of speculation, Malaysia has finally announced the introduction of a goods and services tax (GST) with effect from 1 April 2015. Taxand Malaysia explores how GST will affect the current tax regime.

GST in Malaysia will operate along the lines of other GST and VAT regimes globally, and will replace the existing sales tax and service tax regimes in Malaysia. With the 1 April 2015 introduction date, businesses only have a lead time of 17 months to get themselves GST ready. The relatively short lead time will be challenging for businesses, particularly larger enterprises with various types of supplies. As with other VAT/GST systems, an entity which makes mixed supplies will need to be able to track and apportion input-tax credits. For certain industries, representations have been made to seek fixed recovery ratios or to seek clarity on how the apportionment should be done. To date, the authorities have released some guidelines for various sectors, but there is much work to be done by the authorities to create the certainty that taxpayers need to prepare for GST effectively and efficiently.

The Government has also announced various initiatives as part of a GST package including the following:

A reduction in the corporate income tax rate from 25% to 24% with effect from the year of assessment (YA) 2016

Individual income tax rates will be revised downwards by 1% to 3% across all chargeable income bands with effect from YA 2015 after the implementation of GST

Accelerated capital allowances (ACAs) on the cost of information and communication technology equipment (ICT equipment) will be given until the YA 2016 to assist entities in acquiring the appropriate ICT equipment and software to prepare for GST implementation

Expenses incurred for GST-related training in accounting and ICT will be given double deduction for tax purposes for the YAs 2014 and 2015

The introductory GST rate of 6% is currently the lowest among Southeast Asian countries. Malaysia’s immediate neighbours, Thailand and Singapore, both operate GST at the rate of 7%. However it is worth noting that both these countries have lower corporate tax rates than Malaysia - Singapore’s rate being 17% and Thailand’s rate being 20%. In time, it is expected that the 6% GST rate will increase, and with it, corporate and income tax rates should gradually decline.

Taxand's Take

The introduction of GST in Malaysia is an important change that will have a significant impact on businesses. The relatively short lead time will mean that businesses need to act fast to take the necessary steps to ensure GST compliance by 1 April 2015. Businesses must therefore review their processes and supply chains to identify the incidence of GST at each stage of the supply chain, review their contracts and trading terms to manage the transition to GST and ensure appropriate systems and documentation are in place to account for and ensure GST compliance.

The Malaysian Government in turn, must release the GST laws/regulations as soon as possible to enable businesses to manage their transition to GST and ensure appropriate channels are in place to resolve the uncertainties which will invariably arise with the introduction of a new tax.